Russia ETF Still Caught in a Tempest

Russia’s strong veneer was thrown off as the government conceded to a crisis that is spreading to the economy and their ETF.

In two months, Russia has spent $57 billion defending the ruble, but the Kremlin is worried that it is showing little or no effects, according to The Economist.

Industrial production growth has almost stopped since chugging along at 5.4% in the first half of the year. The World Bank predicts a drop to 3% in 2009. In five months, the stock market has lost two-thirds of its value.

Russia has the third-largest reserves, but it still allowed firms to borrow cheaply from abroad. The World Bank states that debt made up almost 85% of Russia’s total capital inflow last year thus resulting in an external debt higher than Russia’s $475 billion in reserves.

The central bank has to resist the ruble’s depreciation, as outflow of capital is used by firms to exchange rubles for dollars to repay foreign debt or to protect themselves from fluctuations in currency.

Economists see that rising wage arrears show non-payments will tamper with consumption, a major source of growth.

On Nov. 11, the central bank raised interest rates by 1% to 12% to stem capital outflows and allowed the ruble to depreciate against a number of currencies by 1%.

The central bank suggests raising interest rates above inflation, which was 14% in October, to discourage people from changing rubles into dollars, due to the depreciation of the ruble. By defending the ruble, Russia will bleed out is reserves and raising interest rates without liberalizing the economy would smother it.

The Market Vectors Russia ETF (RSX) could be in for some more grueling times. It is down 73.2% year-to-date.

Comments

[Pipo:]

Jim Rogers has always said not to invest a dime in Russia.

He was completely right. Russia is a mess.

www.jimrogers-investme...

2008 Dec 01 01:31 PM

[fran:]

the russian circumstance sounds much like we may experience, should all our efforts with worthless dollar stuffing into the deflation void fail. will our efforts end in hyper-inflation or hype-deflation, or, if you believe in the three bears[no pun intended], "just right" ?

2008 Dec 01 01:44 PM

[NOWHEREMAN:]

hyper-inflation but not before a few deflationary spasms.

Look for RSX to double quickly if Russia pays its "dues".

Russia wants in, Opec says prove it. The Dec. 17th meeting will tell the tale. If Russian output is curtailed and it gets Venez. to agree, Opec will allow Russia to join the cartel. The cut will be at least 2 million, maybe 3.

The Saudi Oil minister says $75 needed for marginal players. Russia, Iran, Venez. are the marginals. They do not get the results without contributing to the outcome.

Two weeks, If they succeed, if if if, ETFs like RSX, PZD, etc will move up sharply. ditto GXD, if if if...

IMHO

2008 Dec 01 02:09 PM

[vamerike:]

Interestingly, I've heard the opposite: that Russia is not looking to join the cartel just because it prefers being more flexible with its production and export targets.

Logically, it makes sense: OPEC members benefit more if cartel becomes stronger, while for Russia, the benefits of joining are less clear...

2008 Dec 01 03:08 PM

[NOWHEREMAN:]

I don't know if I have the article anymore. I read it prior to the last Opec meeting, official capacity adjustment meeting that is.

Russia is unable to prop up the Ruble having already sold about 15% of the dollar reserves it had built up. Higher oil prices will strenghten the Ruble, in addition, it will allow them to continue to expand.

2008 Dec 01 06:17 PM